Pyongyang's newest SEZ just another
shortcut By Leonid Petrov
Last week, North Korea announced to the
world that it would make its two islands
Hwanggumpyong and Wihwado a visa-free zone for
foreigners. A special law has been adopted to
attract foreign investors and give them
preferential treatment in the payment of tariffs
and taxes and in land use. Will this change in
policy rescue the country from poverty and change
things for the better?
Those who are
familiar with Korean history will recall the
Wihwado Retreat of the 14th century. In 1388,
General Yi Seong-gye of the Koryo kingdom was
ordered to march north with his army and invade
the Liaodong Peninsula, which was under the
control of Ming China. However, when his troops
reached Wihwa Island in the estuary of the Amnok
(Yalu) River, General Yi suddenly changed his
mind. With the support of high-ranking government
officials and the army,
Yi decided to return to the capital, Kaesong, and
trigger a coup d'etat. He toppled the Koryo king
and ascended the throne himself as King Taejo, the
founder of Joseon Dynasty.
King Taejo's
change of heart comes to mind in the context of
the modern situation. In an effort to turn the
tide of its economic development, North Korea
selected the islands of Wihwa and Hwanggumpyong as
the future site of the country's special economic
zone (SEZ) with China. Although the move goes
against the grain of North Korea's traditional
tendency to isolate itself, the islands lie at the
mouth of the Amnok River, which has served as a
natural border between the two countries since the
time of Yi Seong-gye. Its location, just opposite
the cities of Sinuiju on the Korean side and
Dandong on the Chinese side, adds strategic
importance to this historic place. In June 2011, a
start-up ceremony took place on the island in
recognition of the North Korea-China joint
development and operation project.
The
executive decision to develop the abandoned
islands into a thriving industrial park was made
by the late North Korean leader Kim Jong-il, who
frequently visited China to solicit economic aid
and investment. Soon after his death last
December, his son and successor, Kim Jong-eun,
called on the citizens of North Korea actively to
do business with China and "bring in as much cash
profit as possible". As such, the commercial
importance of the Hwanggumpyong and Wihwado
Economic Zone has only increased, raising
speculations that it would be turned into the
playground of capitalism for North Korea's
centrally planned and autarkic economy.
The earlier experience of joint
development and cooperation in the Rason
(Rajin-Seonbong) Economic and Trade Zone showed
that neighboring China was keen on aggressively
investing in infrastructure and manufacturing
sectors provided they could be guaranteed an upper
hand in competition against Russian, Japanese or
South Korean investors. China's access to the Sea
of Japan (or East Sea to Koreans) is cut short by
the 17-kilometer-long Korean-Russian border,
rendering the industrial base of Jilin and
Heilongjing landlocked. On the contrary, the
Hwanggumpyong and Wihwado Economic Zone, at the
mouth of the Yalu (Amnok) River, which flows into
the Yellow (West) Sea, seems to be a more
attractive option for China.
Beijing once
before thwarted North Korea's plans to set up an
SEZ in Sinuiju, where Pyongyang intended to create
a new Hong Kong or Macau. Chinese billionaire Yang
Bin was appointed by Kim Jong-il as the governor
of Sinuiju Special Administrative Region in 2002.
That same year the North Korean government enacted
a new economic policy on wage and pricing systems
based on self-accounting management, known as the
"July 1 Measures". To Pyongyang's dismay, China
was not impressed by the prospects of having
another Hong Kong on its northeastern frontier and
quickly arrested Yang Bin for tax evasion. The
message was clear: Any development close to
China's borders must be endorsed by Beijing.
This time, the Hwanggumpyong and Wihwado
Economic Zone is the product of a Sino-North
Korean administrative and trade agreement. Even
the recent announcement that foreigners would be
granted visa-free access and enjoy tax breaks
still manages to provide China with full control
over the movement of people and capital within its
territory. Pyongyang's official Korean Central
News Agency reported that "upon presentation of
passports or other equivalent documentation,
foreigners and vehicles may enter or leave the
zone through the designated route without a visa".
It also promised that "customs duties will not be
levied on materials brought into the zone for
processing, or on finished goods". China's control
of the surrounding geography means that Chinese
investors and manufacturers will have an upper
hand in trade.
North Korea is in no
position to bargain. Pyongyang's dependence on
Beijing is growing as international sanctions over
its nuclear and missile programs make it
increasingly difficult for it to access
international markets and credit. The impoverished
country is striving to revitalize its economy
through foreign investment in its economic zones.
Since China has already invested about US$3
billion in developing port facilities and roads in
the Rason Economic and Trade Zone, Beijing might
decide to funnel significant capital to the
Hwanggumpyong and Wihwado Economic Zone too. But
will this contemporary "Wihwado Retreat" rescue
the North Korean economy?
Beijing would
love to see Pyongyang follow its example by
introducing market-oriented reforms, but North
Korea simply cannot come to terms with granting
its population the many freedoms necessary to make
such a reform successful. Even the Chinese-style
reform of the late 1970s required some basic
liberties (freedom of movement, information,
association, etc). This is simply impossible in
the conditions of an ongoing Korean War, in which
North Korean society is continuously fed lies by
the regime and inherently fears interaction with
the rest of the world, particularly South Korea.
If Pyongyang decides to initiate reform,
Chinese-style or otherwise, it would inevitably
and quickly lead to the collapse of North Korea's
political regime. Therefore, the very word
"reform" is taboo in North Korea.
The
North Korean leadership genuinely wants to
modernize the economy but does not want to change
its social and political life. Pyongyang is
constantly searching for shortcuts that could
boost its dysfunctional economy without having to
conduct systemic reform. The new leader, despite
of his young age, is surrounded by conservative
older family members and elites who have no
visionary plan for developing the country. Setting
up tiny SEZs, which would generate foreign
exchange without bringing about any change to the
rest of the country, is a preferable way forward.
As a result of this half-hearted policy, ordinary
North Koreans will eat and dress better; they
might even own personal computers and mobile
phones. But they will continue to live in the same
paranoid state of fear and dependency on the Great
Leader's decisions.
The visa-free regime
and tax holidays promised for the Hwanggumpyong
and Wihwado Economic Zone are simply measures to
lure a handful of random foreign investors and
should not be seen as a sign of change in the
economic thinking of Kim Jong-eun. Neither reform
nor economic liberalization is in the cards
because either of these would immediately
jeopardize domestic stability. The zones of
economic cooperation are reluctantly permitted by
the North Koreans with apprehension that possible
ideological contamination might cost more to the
regime than economic benefit.
Given the
circumstances of the ongoing inter-Korean
conflict, the sustainable development of the North
Korean economy is impossible. The regime is locked
in a security dilemma and is reluctant to
experiment. Only peaceful co-existence and
economic collaboration between Seoul and Pyongyang
would remove fears and rebuild trust.
Increased inter-Korean cooperation, where
the plentiful resources of the North are
complemented by the cutting-edge technologies from
the South, is capable of bringing North Korea back
from its prolonged socio-economic crisis. Such
collaboration would also enhance the powerhouse of
South Korea, opening new markets beyond the
Military Demarcation Line and linking the
trans-Korean railway to the Eurasian continent.
Leonid A Petrov PhD is a
lecturer in Korean studies at the School of
Languages and Cultures, Faculty of Arts and Social
Sciences, University of Sydney.
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